“Do it. Nothing is easier.”
-Achilles (Troy, 2004)
Nothing is easier than wiping all of your screens clean at the end of a long year.
Yesterday, year-end market prices were booked in major markets like Germany (+16.1%), Spain (-17.4%), and Japan (-3.0%). Overnight we got the rest of Asia to submit their scores as well. No matter where we go in the world this morning, here are the year-end results:
The Top 3 stock markets so far are Sri Lanka, Indonesia, and Latvia. The Bottom 3 are Spain, China, and Italy.
On the long side, we’ve been bullish on Indonesia in the Hedgeye Portfolio but we sold it way too early this year. We certainly didn’t get Sri Lanka or Latvia right on the long side either. We still have a 9% long position in the Hedgeye Asset Allocation Model to Germany.
On the short side, I think we managed global macro risk pretty well. At the beginning of 2010, two of our top 3 Macro Themes were Chinese Ox in A Box (bearish on China) and the Sovereign Debt Dichotomy (bearish on Spain, Italy, and Greece).
On the US stock market side, while there’s been much bonus-season oriented fanfare heading into year-end, the SP500 underperformed more than half of the world’s stock markets this year. It also underperformed Commodities.
This is not to say that a +12.7% annual return in the SP500 is bad. It’s good.
It’s just not great. It’s below both of these important asset class averages:
Being long US stocks beat being long the US Dollar. But don’t forget that from June to November (when we were short the US Dollar) that wasn’t hard to do. That’s when the US Federal Reserve adopted it’s explicit policy to inflate. In doing so, it debauched the world’s reserve currency and put inflation expectations right back to where they were before Bernanke said he saw no inflation with $150 oil in 2008.
Actually, calling it 2008 style inflation isn’t fair. Nothing Is Easier than seeing 2011 style inflation now. Copper prices are hitting all-time highs this morning (higher than the 2008 levered-long highs) at $4.42/lb.
What will be most interesting to me in 2011 is whether or not inflation starts to matter to US Equity markets like it has started to matter to global equity (China, India, and Brazil, etc) and bond markets since The Ber-nank opted for Quantitative Guessing (QG2) in November.
While I’m not a big fan of being locked into “best ideas” from January 1st to December 31st of a calendar year, I am a big believer that you need to wake up every morning accepting that uncertainty will dominate every day in between. Nothing Is Easier than doing that.
My immediate term TRADE lines of support and resistance in the SP500 are now 1254 and 1265, respectively.
Best of luck out there in the New Year,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP - December 31, 2010
As we look at today’s set up for the S&P 500, the range is 11 points or -0.31% downside to 1254 and 0.57% upside to 1265. Equity futures are little changed to fair value in the last trading session of the year. On Thursday, US equities closed slightly lower which was only the fourth down day this month for the S&P 500.
OTHER DATA AND NEWS EVENTS TODAY:
CREDIT/ECONOMIC MARKET LOOK:
Treasuries were weaker with the curve more or less flat.
OTHER COMMODITY NEWS:
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This note was originally published at 8am on December 30, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“This piece of heaven that I've found;
Rocky Mountains and black fertile ground;
Everything I need beneath that big blue sky;
It doesn't matter where I go;
This place will always be my home;
Yeah I've been Alberta Bound for all my life;
And I'll be Alberta Bound until I die.”
- Paul Brandt
For those that have experienced an Alberta winter, you may disagree with Canadian singer and song writer Paul Brandt that Alberta is a great place to be bound for in December. In fact, our Chief Operating Officer was in Calgary a month ago on a day in which Calgary registered as the second coldest place on the planet. While he was a bit whiny about that fact, in my opinion, cold weather is like anything – if it doesn’t kill you it makes you stronger. Last night I took my nieces and nephew on a sleigh ride in -20 degrees Celsius weather and I think it made them stronger.
I always enjoy flying back home to Alberta and into the Calgary International Airport. Each time I’m struck by two things: the vastness of my home province and the rapid growth of Calgary, the business capital of the Canadian energy industry. The newest addition to the growth of Calgary is a 59-story office tower called “The Bow”, which will be the largest office tower in Canada outside of Toronto when it’s completed in 2012. This tower will become the world headquarters of Encana, a global leader in non-conventional gas production.
Alberta is the home to the vast majority of Canada’s energy resources. In particular, the Canadian oil sands, containing ~170 billion barrels of oil reserves, is second only to Saudi Arabia and accounts for just over 13% of all global reserves. It is estimated that the Canadian reserves could supply Canadian energy needs for the next 400 years. This is true energy independence.
These vast energy resources are one of the key factors supporting our long position in the Canadian Dollar (or the Loonie) in the Virtual Portfolio. Not only is Canada completely energy independent, it will also benefit in a weak dollar environment which inflates the prices of U.S. dollar-based commodities, such as oil. While the United States gets squeezed in a high oil price environment, Canada becomes cash rich, as 99% of Canadian oil exports get sent to the U.S. Clearly, the current U.S. Federal reserve policy of Quantitative Guessing is very supportive of our long Loonie position.
It is estimated that energy contributes ~31% of Alberta's GDP and almost 5% of Canada's GDP overall, therefore the price of oil has a real impact on Canadian GDP. As the price of oil increases, Canadian GDP will directly benefit. Moreover, as Canadian production increases, energy’s contribution to Canada’s GDP will grow. Currently, Canada represents ~6% of global oil production through ~13% of global reserves. Over time, as we’ve seen throughout the last decade, Canada’s production share globally will begin to mirror its reserve share, which should create a major tailwind for Canadian GDP in the next decade.
Our Energy Team led by Lou Gagliardi recently released their top 10 list for energy investment ideas in 2011. Not surprisingly, a number of these ideas were Alberta based energy companies. So without further adieu, our top 3 Alberta ideas for 2011:
1. CANADIAN OIL SANDS TRUST (COS) – Mispriced conversion
The company is converting to a corporation from a trust at the end of December 2010. The stock recently took a hit on news that COS will cut its dividend payout ratio in half upon conversion to a corporation in order to maintain cash flow within capital spending. COS is 100% levered to oil sands production, as the largest partner (36.74% interest) in the Canadian Syncrude Joint Venture.
We view COS a company with upside earnings potential in 2011 -- potentially a 63% increase from 2010 to C$2.04/share at $85 oil, and net cash flow positive C$0.20/share after capital spending. At $89 per barrel oil, earnings could increase further to C$2.28/share, with net cash flow at C$0.45/share. We view shares as oversold, as the market overreacted to the dividend reduction news, presenting a buying opportunity. COS is undervalued by roughly 30% according to our discounted cash flow models. The company's operating fundamentals remain strong, particularly with high oil price leverage. The balance sheet has a moderate debt-to-capital ratio at ~23%, net of cash at ~21%.
2. NORTH AMERICAN ENERGY PARTNERS (NOA) – Predictable cash flow and dirt cheap
This Canadian oil sands resource "services" provider has been hit hard by the downturn in Oil Sands project expansion that began in 2009 and continued into 2010. NOA provides oil sands mining and site preparation, piling and pipeline installation services: as of the end of September, revenue from oil sands services generated 83% of net revenue, 84% of which is recurring revenue. Although its balance sheet remains under pressure at ~57% debt-to-capital and net of cash at ~50%, recent projected increases in capital spending by oil sands companies and the resumption of oil sands growth projects is good news for NOA, which will benefit from increased project spending.
Oil sands project growth will provide the catalyst to earnings growth into next year. For NOA's fiscal year ending March 2011, earnings are expected to decline 21% to C$0.61/share, but earnings for fiscal year 2012 (beginning in April 2011) should bounce back by ~120% to $1.36/share, driven by higher oil sands spending, which equates to just under 10x earnings. Net cash flow for both years should remain positive, with fiscal 2012 expected at $32 million or C$0.90/share.
3. MEG ENERGY (MEG) – Growth with a monster balance sheet
MEG Energy is a bitumen producer based in Calgary, Alberta with shares traded on the Toronto Stock Exchange. We expect MEG's 2011 earnings to benefit from a full year in operation, a 3% increase in oil sands production lower operating costs per barrel, and expanding margins. With its strong balance sheet, a strategic partner in China's CNOOC owning 15%, debt-to-capital at 21% and net of cash at negative ~13%, we believe MEG is being underpriced by the market by roughly 30%.
The company is sitting on roughly C$1.4 billion in cash -- more than enough to meet its expected net cash flow deficit after capital spending of roughly ~C$600 million for 2011. It is in the growth mode, ramping up production for its next phase of expansion at Christina Lake, with expected start-up in 2013. Based on $85 oil in 2011, MEG's 2011 earnings should top consensus, reaching ~C$0.92 per share, up more than 150% increase from 2010. Should crude oil average $89 in 2011, MEG's earnings could go about 16% higher to ~C$1.06.
You would be remiss not make your energy portfolio “Alberta Bound” in 2011.
Yours in risk management,
Daryl G. Jones
POSITION: Short SPY
I’m not short everything in global macro, but I am short the SPY. The short position is -2.73% against me. Don’t I feel like a genius.
Selloffs in the US stock market in December have been few and far in between. While it’s incredible, it doesn’t mean it’s not a historical fact. The SP500 hasn’t had 2 consecutive down days yet for the entire month. Today’s intraday selloff has been like every other selloff in December – fleeting.
Having just snapped my Achilles tendon, I can assure you that when the music stops, it can stop abruptly. For now, this is a stock market that the Big Broker artist formerly known as Chuck Prince would have loved. When the music is playing that is…
My immediate term TRADE lines of support and resistance are now 1254 (which has held today) and 1265, respectively.
Keith R. McCullough
Chief Executive Officer
R3: REQUIRED RETAIL READING
December 30, 2010
OUR TAKE ON OVERNIGHT NEWS
Wal-Mart Tests New Smaller Concepts - Wal-Mart is getting flexible and it’s hoping that approach will help it crack New York City at last. The world’s largest retailer tried unsuccessfully in 2005 to open a store in New York — it searched for a site for a SuperCenter, but finding the necessary 185,000 square feet of space was, and still remains, difficult. Now, five years later, the Bentonville, Ark.-based company is adopting a new strategy armed with an arsenal of store formats, including some never-before-seen concepts and a rejigged SuperCenter — its size reduced to as little as 80,000 square feet and categories not crucial to urban areas, such as lawn and garden centers, eliminated. The redefined approach stems partly from necessity — the suburbs have become saturated and Wal-Mart needs to enter more urban markets if it is to grow in the U.S. “We’re addressing size and being more flexible in our approach,” said Steven Restivo, Wal-Mart Stores Inc.’s director of community relations for the Northeast. “The way we’re bridging the gap between larger traditional stores and smaller, more efficient formats is our site-to-store multichannel experience option.” The retailer’s latest format is a 3,500-square-foot store called Wal-Mart on Campus, which will open at the University of Arkansas next month, replacing a university-run pharmacy. “It’s probably the smallest-format store,” Restivo said. “It’s a [pharmacy] and campus merchandising store with licensed apparel.” Wal-Mart on Campus was developed at the university’s behest as a one-off to meet the university’s needs. While there are no similar stores in the works, lessons might be gleaned from the project and its size could be appealing in urban areas. <WWD>
Hedgeye Retail’s Take: Cutting the stores footprint down to 80k sq. ft. in urban markets not only makes sense (e.g. shedding the garden center), but it’s also a necessity as the retailer has come to find out. While a 3,500 sq. ft. Wal-Mart is tough to envision, we’d expect the retailer to keep to the big box, but just small enough to start penetrating inner cities.
Storms Impact Estimated at $1Bn - The titanic Sunday snowstorm that paralyzed much of the Eastern seaboard might have cost retailers $1 billion in the two days after Christmas. That’s the preliminary estimate from ShopperTrak RCT Corp., the Chicago-based firm that provides research and analysis on retail sales and traffic, based on what it termed a “conservative” appraisal of the impact of the Dec. 26 storm on business Sunday and Monday. The company estimated the storm took an 11.2 percent bite out of the traffic anticipated for Dec. 26. While year-on-year traffic fell 6.1 percent in the Northeast, the average increase in traffic in the Midwest, South and West was 38.6 percent. The impact on business on Monday was more severe, reducing total traffic 13.9 percent, with a 42.9 percent drop in the Northeast, more than offsetting increases averaging 13 percent in the other three regions. Preliminary estimates of GAFO — general merchandise, apparel and accessories, furniture and other categories — sales for the two-day stretch were $10 billion. Although much of the lost business could be reclaimed as consumers resume their normal routines, any irretrievable volume could cut into December sales and retailers’ ability to minimize inventories, putting a damper on fourth-quarter and year-end earnings. Nonetheless, ShopperTrak reaffirmed its estimate for a 4 percent rise in sales and a 1.8 percent increase in traffic for the two-month holiday period. <WWD>
Hedgeye Retail’s Take: Notable traffic declines for sure, but what's being overlooked in all of this is the 4-weeks leading up to the storm that were unseasonably cold boosting sales across much of the Midwest and East Coast in the process.
M&A Expectations Heading into 2011 - U.S. consumers put the brakes on dealmaking in 2010. They may be the accelerator next year. Chief executives maintained record levels of cash this year as the recession-weary consumer fueled doubts about an economic recovery. While mergers and acquisitions topped $2 trillion in 2010 -- the first increase in three years -- the amount failed to approach 2007’s $4 trillion peak in global takeovers. Shoppers may help bring 2011 closer to that total. Holiday sales jumped 5.5 percent in the U.S., the best performance in five years, on purchases of clothing and jewelry, according to MasterCard Advisors’ SpendingPulse. As spending rises, companies are more optimistic and willing to take on risk, according to Joseph Gromek, chief executive officer of New York-based Warnaco Group Inc., owner of the Calvin Klein and Speedo brands. “There will be a very aggressive approach,” Gromek said. “The companies that have strong balance sheets with lots of cash on hand will try to be as opportunistic as possible.” The 1,000 biggest companies worldwide, excluding financial- services industries, have amassed more than $3 trillion in cash and equivalents based on their latest filings, according to data compiled by Bloomberg. Most companies and their boards stayed conservative this year, waiting to see how the economy rebounded before pursuing deals, he said. Warnaco invested in its operations and foreign distribution in 2010, and may now look at acquisitions, Gromek said. “Interest rates are very favorable,” he said. <Bloomberg>
Hedgeye Retail’s Take: Our sense is that the commentary from executive teams coming out of ICR next month will be similar with organic growth prospects continuing to look challenged.
L.A. Retail Recovery Slow But Improving - The gulf separating the haves and have-nots among specialty retail districts here is widening. Prime stretches of marquee venues — Rodeo Drive, Robertson Boulevard, Melrose Place and Melrose Avenue — are starting to get traction, but second- and third-tier retail enclaves have it tougher. In the top areas, vacancies are diminishing, rents are bottoming out and newcomers are taking root. The total number of available retail spaces can be counted on fewer than two hands on the key blocks of Robertson Boulevard and Rodeo Drive. There’s a flurry of launch and leasing activity, particularly on Rodeo, with Lanvin, Tom Ford, G-Star, Stephen Webster, Richard Mille, Agent Provocateur and Solange Azagury-Partridge opening this year or in 2011. “The confidence is definitely coming back” in the top tier of the market, said Stuart Millar, executive vice president of G-Star North America, which plans to open a 5,000-square-foot flagship on Rodeo Drive in the first quarter of 2011. “There is another six- to 12-month window where you can be pretty aggressive with getting the right deal from the landlord.” Patrick Ortiz, a vice president of NAI Capital who handles the leasing and sale of properties in West Los Angeles, estimated vacancies were as high as 50 percent on certain blocks off the main drags. “The shift is from the landlord as the monster to tenants as the monster,” he said. “Tenants are able to make deals they have not been able to make in 50 years.” <WWD>
Hedgeye Retail’s Take: There has been a notable shift in the past year as it relates to retailers’ appetite for resuming store growth particularly of late. While demand is starting to return (at a price), we expect the environment for negotiating leases will remain favorable for retailers for a few more quarters before the environment begins to normalize.
Customs Intercepts Knock-off NHL Goods - U.S. Immigration & Customs Enforcement said Wednesday it had seized $100,000 worth of counterfeit sportswear, apparel and other merchandise in Pittsburgh as part of a monthlong joint enforcement effort with Customs & Border Protection and the U.S. Postal Inspection Service. ICE said agents seized fake National Hockey League and National Football League jerseys, hats and T-shirts, along with counterfeit Ugg boots and other brand name shoes, handbags and apparel. In all, 792 items were confiscated during the enforcement effort. ICE and CBP are both part of the Department of Homeland Security. The initiative was aimed at netting fake NHL Winter Classic merchandise. Pittsburgh is scheduled to host the NHL Winter Classic, an annual event in which regular season hockey games are held outside, on New Year’s Day. <WWD>
Hedgeye Retail’s Take: A small-scale bust, but important win for Customs nonetheless as it begins to make good on efforts to step up enforcement against counterfeiting. Several small wins can add up and more importantly send an even stronger message to the culprits who’ve made 'easy money' in the past.
Apple Sued Over Sharing Personal Data - Apple is the target of a class action lawsuit over the way its apps share personal information with outside parties, according to a Bloomberg report. The lawsuit comes a week after a Wall Street Journal article about user information being shared by some popular mobile apps "widely and regularly." The lawsuit names applications such as Pandora, Paper Toss, the Weather Channel and Dictionary.com, according to Bloomberg. The Wall Street Journal article claims that in both the Android and iPhone versions of the Pandora app "sent age, gender, location and phone identifiers to various ad networks." <BrandWeek>
Hedgeye Retail’s Take: This is exactly why behavioral marketing is slow to materialize.
Guatemala Labor Practices in Question - Guatemala’s textiles and apparel industry has rejected U.S. and local trade union claims of significant labor law violations under the Central American Free Trade Agreement, branding them as “unsubstantiated.” The U.S. launched an inquiry against Guatemala last summer for “apparent violations of obligations on labor rights,” adding that it hopes to see the government take “specific and effective action — including, if appropriate, legislative reforms — to improve the systemic failures in enforcement of Guatemalan labor law.” Based on a 2008 AFL-CIO union investigation, the Obama administration claimed Guatemala is failing to enforce laws to enable workers to unionize, organize and bargain collectively and promote acceptable working conditions. The U.S. also expressed “serious” concern about labor-related violence, which has seen several nontextile union leaders killed in recent years and which is “apparently deteriorating.” The case saw both countries engage in labor consultations. If Guatemala fails to address the problem, it could be forced to pay $15 million into an annual fund to improve labor standards. Guatemala is forecast to export $1.5 billion worth of textiles and apparel this year, solidifying its status as the biggest U.S. supplier under the CAFTA bloc comprising Dominican Republic, Honduras, Nicaragua, El Salvador and Costa Rica. While some observers say working conditions have improved since Guatemala joined CAFTA, Lacs said “sweatshop” conditions remain, with many people logging 10- or 11-hour days with no overtime, especially in the subcontracted firms. <WWD>
Hedgeye Retail’s Take: For many reasons, the least of which is the global perception of dealing with a neighboring trading partner in violation of labor laws, the U.S. would do well to work with the Guatemalan government to improve the standards of its largest apparel supplier in Central America.
Chinese Cotton Imports up in November - China imported 126,000 tons of cotton in November, up 31% compared to October or a year-on-year increase of 11.8%, according to statistics released by the General Administration of Customs. In the first eleven months of this year, China imported 2.38 million tons of cotton, up 81.4% compared with the same period of last year. In November, cotton's import price was US$2,356 per ton, 10.6% or US$225 more than in October. Uzbekistan overtook the US as the largest cotton export origin to China. The government announced in September that it will lift China's cotton import quota from previously planned 894,000 tons to 2.7 million tons to curb the price fluctuation. <FashionNetAsia>
Hedgeye Retail’s Take: Continued demand growth by the global markets largest buyer. The supply side of this equation continues to be a critical factor in moderating prices near-term.
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